Warren Buffett has another reason to hate Robinhood
It’s no secret that Warren Buffett isn’t a fan of Robinhood.
The Oracle of Omaha has been battling with the online brokerage platform since 2021. So far, the fight has been over a difference in their philosophical views of the stock market.
A recent paper by three academics may have made it more personal, however.
At over $440,000 per share, there’s usually not much trading activity around Buffett’s prized Berkshire Hathaway (BRKA) A stock: Between 2010 and 2020, an average of 375 shares were traded daily . Then, in February 2021, trading volume spiked to almost 2,000 shares per day, where it is remained since.
The increased activity caught the attention of market watchers but remained a mystery. Some have speculated that there was a super buyer picking up the stock.
But a study published last month by professors from the University of California at Berkeley, Columbia Law School and Cornell University found that the turbo boost in the trade was not the result of any super buyer. In place, volumes of the most expensive stocks in the United States have been artificially inflated by the way brokers like Robinhood report split trades.
The increases come from what the researchers call “phantom and nonexistent trade.” When a brokerage completes a private off-exchange stock trade, such as the split trades executed by Robinhood, it is required to report the trades to the Financial Industry Regulatory Authority as if it were a full stock. Under this “rounding rule”, an investment as small as 1/100th of a share in Berkshire Hathaway would count as a purchase of a full share of $440,000.
Researchers say this “well-meaning but misguided” FINRA rule added an equivalent incremental volume of more than $1 billion per day to Berkshire Hathaway A shares. The reported phantom volume represents 80% of their daily trading volume .
DriveWealth, which processes stock trades for investment apps such as Cash App, also reported fractional stock trades in Berkshire to the FINRA database and increased trading volume, according to the study.
“FINRA’s reporting rule for split trading has created significant distortions,” the authors of the paper wrote.
A FINRA representative told CNN Business that the agency is “already actively working on the issue and engaged in ongoing discussions with companies and regulators.”
Fractional trading brokers like Robinhood, meanwhile, are “a fly in the ointment,” for Buffett, Robert Bartlett, a professor at the University of California, Berkeley School of Law and co-author of the study.
“Buffett wants to keep the price of its Class A shares high to attract long-term value investors,” he said. “It’s not the people who are buying these fractional shares, and so they’re undermining his main view of the action.”
Buffett doesn’t mince words when speaking out against Robinhood. Brokerage is “a very important part of the casino aspect, the casino group, which has come into the stock market over the last year or year and a half,” he said during his Berkshire Hathaway’s 2021 shareholder meeting, referencing the recent meme stock craze.
Charlie Munger, Buffett’s right-hand man, joined this year’s shareholder meeting, calling the brokerage’s business model “disgusting”.
Robinhood counters that it is “democratizing” Wall Street by creating an easily accessible trading platform that allows investors to engage in fractional trading, buying small percentages of shares.
“There’s an old guard that doesn’t want average Americans to have a seat at the table on Wall Street, so they’ll resort to name-calling,” the company said in a statement last year.
“The opponents of this future and change are usually those who have enjoyed abundant privileges in the past and do not want those privileges disrupted,” Robinhood added, saying “the new generation of investors is not a group of casinos”. ‘”
Either way, Robinhood might have more trouble ahead.
Robinhood announced on Tuesday that it would lay off around 23% of its staff following a sharp drop in trading activity on the platform. It is the second round of layoffs this year and is part of a wider reorganization effort led by CEO Vlad Tenev.